Video: Non-Refundable and Refundable Credits

In this lesson, Nick Palazzolo, CPA, unpacks the differences between non-refundable and refundable tax credits and their respective effects on taxpayers' liabilities. With a clear and engaging explanation, Nick demystifies these two types of credits, underscoring their dollar-for-dollar impact on owed taxes, the conditions under which they may result in a refund, and the limitations of carryforwards. He provides a rundown of various non-refundable credits, such as the child and dependent care credit, credits for the elderly, and education credits, emphasizing their intent to support individuals and promote societal benefits. Nick then shifts focus to refundable credits, detailing how certain taxpayers can receive refunds that exceed their tax obligations, and concludes by highlighting unique aspects of credits like the American opportunity credit, which can be partially refundable. Throughout the lesson, he ensures a lucid understanding of these crucial tax measures with practical insights and examples.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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As kind of alluded to before, we've got two types of credits. We've got non-refundable credits and refundable credits. Now, both of these are designed to provide taxpayers with financial relief, thank the Lord, by reducing their tax liabilities. Both non-refundable and refundable directly reduce a taxpayer's taxes owed on a dollar for dollar basis. Now, this means that for each dollar of credit, the taxpayer's tax liability is going to be reduced by an equivalent amount. However, these are going to function differently in terms of their potential to generate a refund. We'll dive into that, but essentially non-refundable means you can't go below zero, you're not going to get a refund, and refundable means you can get a refund if you go below zero of taxable income. First, we're going to deal with our non-refundable credits. Now, I'd say overall, yeah, make sure you kind of memorize which of these credits are non-refundable versus which are refundable. Of these, we've got brief descriptions of each credit, but we will go through each credit in its own slide with examples as they differ in the level of importance. Now, these non-refundable tax credits, these can reduce a taxpayer's tax liability to zero, but they cannot result in a refund, as we've mentioned. In other words, if the total amount of these non-refundable credits, let's say it's $10,000 of non-refundable credits and we only owe $2,000 of taxes, well, we can only take $2,000 of credits and then we'll carry forward those credits. Depends on the credit on those rules. What's not refunded? Some of these common ones are going to be the child and dependent care credit. This is going to be different than the child credit. That's something I'll mention a few times, but it is something that's

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